» Mooney, et al. v. Diversified Business Communications, et al. (Lawyers Weekly No. 09-030-18)

Mooney, et al. v. Diversified Business Communications, et al. (Lawyers Weekly No. 09-030-18)

COMMONWEALTH OF MASSACHUSETTS
SUFFOLK, ss. SUPERIOR COURT.
1684CV03726-BLS2
1784CV03423-BLS2
____________________
JOHN J. MOONEY and MORGAN D. WHEELOCK and JOHN SQUIRE and MACGREGOR INVESTMENTS CORPORATION
v.
DIVERSIFIED BUSINESS COMMUNICATIONS; DBC PRI-MED, LLC; THEODORE WIRTH; KATHY WILLING; and OAKLEY DYER
____________________
MEMORANDUM AND ORDER ON DEFENDANTS’ MOTIONS TO DISMISS FIVE OF SIX CLAIMS IN EACH ACTION
The four Plaintiffs are former minority members of a closely-held Delaware company called DBC Pri-Med, LLC. The majority member is and was defendant Diversified Business Communications. The three individual defendants are all managers of Pri-Med; none of them has any ownership interest in the company.1
In January 2017 Pri-Med called Plaintiffs’ shares, as expressly permitted in Pri-Med’s operating agreement. This LLC Agreement provides that an appraisal firm to be selected by the parties shall determine the value of any called (or put) shares, based on a valuation of Pri-Med as a going concern and without discounting that value for the illiquidity or minority nature of any shares.
Plaintiffs allege that Defendants carried out a scheme to artificially deflate the value of Pri-Med in order to avoid paying Plaintiffs a fair and proper price for redeeming their shares. According to Plaintiffs, this scheme involved artificially decreasing Pri-Med’s assets by selling off its major subsidiary (a company called Amazing Charts) and artificially increasing the company’s liabilities by inflating its expenses and debt.
1 The ownership of Pri-Med was divided into three classes of shares. The Series A shares were voting shares. The Series B-1 and B-2 shares were not. Diversified controlled the company because it held roughly 93 percent of the Series A shares. Each of the Plaintiffs held roughly 1.7 percent of the Series A shares. The four Plaintiffs each held one-fourth of the Series B-1 shares, which gave them certain approval rights. Four other individuals held the Series B-2 shares, which had no approval rights.
– 2 –
Each set of Plaintiffs asserts six claims.2 Count One seeks a declaratory judgment that the sale of Amazing Charts violated the LLC Agreement, and therefore is null and void, because Defendants did not obtain Plaintiffs’ approval. The other claims are for breach of the LLC Agreement, breach of the implied covenant of good faith and fair dealing in the same contract, breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, and certain equitable relief.
Defendants have moved to dismiss all of the claims under Mass. R. Civ. P. 12(b)(6) except for the claims in Count Two for breach of contract. The Court will order that declaratory judgment enter in Defendants’ favor on Count One of each complaint, deny the motions with respect to the claim for breach of the implied covenant of good faith and fair dealing in Count Three, dismiss with prejudice the claims for breach of fiduciary duty and aiding and abetting a breach of fiduciary duty in Counts Four and Five, and dismiss without prejudice the separate claim for equitable relief in Count Six.
1. Alleged Implausibility of Claims. Defendants make an overarching argument that Plaintiffs’ basic theory of their claims—which is that Defendants deliberately stripped Pri-Med of value in order to avoid paying Plaintiffs the proper redemption price—is “absurd” and “nonsensical.” Defendants contend that the complaints must therefore be dismissed because they fail to allege facts plausibly suggesting any entitlement to relief. See generally Lopez v. Commonwealth, 463 Mass. 696, 701 (2012) (to survive a motion to dismiss under Mass. R. Civ. P. 12(b)(6), a complaint or counterclaim must allege facts that, if true, would “plausibly suggest[] … an entitlement to relief”) (quoting Iannacchino v. Ford Motor Co., 451 Mass. 623, 636 (2008), and Bell Atl. Corp. v. Twombly, 550 U.S. 544, 557 (2007)).
This argument is unavailing. Defendants misconstrue Twombly and Iannacchino. A trial court judge cannot dismiss claims because it considers the underlying factual allegations to be unbelievable. To the contrary, in deciding a Rule 12(b)(6) motion, a court must “accept as true the allegations in the complaint, draw
2 Plaintiffs Mooney and Wheelock filed their complaint first; it was docketed as civil action 1684CV03726-BLS2. Plaintiffs Squire and Macgregor Investments filed a separate complaint; it was docketed as civil action 1684CV03423-BLS2. The two complaints are very similar and assert the same claims.
– 3 –
every reasonable inference in favor of the plaintiff, and determine whether the factual allegations plausibly suggest an entitlement to relief under the law.” Barbuto v. Advantage Sales & Mktg., LLC, 477 Mass. 456, 457–58 (2017). The Court must assume “that all the allegations in the complaint are true” even if they are “doubtful in fact.” Iannacchino, 451 Mass. at 636, quoting Twombly, 550 U.S. at 555.
So long as the facts alleged in a complaint plausibly suggest that the plaintiffs may be able to prove their claims, the complaint is not subject to dismissal even if the allegations appear to be “nonsensical,” “extravagantly fanciful,” “unrealistic,” or otherwise “improbable.” See Ashcroft v. Iqbal, 556 U.S. 662, 681 (2009) (“To be clear, we do not reject these bald assertions on the ground that they are unrealistic or nonsensical. … It is the conclusory nature of [the plaintiff’s] allegations, rather than their extravagantly fanciful nature, that disentitles them to the presumption of truth.”); Twombly, 550 U.S. at 556 (“[A] well-pleaded complaint may proceed even if it strikes a savvy judge that actual proof of the facts alleged is improbable.”).
“Put another way, Twombly and Iqbal expressly declined to exclude even outlandish allegations from a presumption of truth except to the extent they resembled a ‘formulaic recitation of the elements of a … claim’ or other legal conclusion.” Connelly v. Lane Const. Corp., 809 F.3d 780, 789 (3d Cir. 2016), quoting Iqbal, supra, quoting in turn Twombly, 550 U.S. at 555. And Iannacchino adopted the same standard under Massachusetts law.
2. Delaware Law Governs. The substantive claims in this case are governed by Delaware law. Pri-Med was formed under the Delaware Limited Liability Act. The breach of fiduciary duty claims are therefore governed by Delaware law. See Harrison v. NetCentric Corp., 433 Mass. 465, 469-472 (2001). In addition, the parties’ LLC Agreement provides that it “shall be construed and enforced in accordance with the laws (other than the law governing conflict of law questions) of the State of Delaware. This provision is enforceable. See Hodas v. Morin, 442 Mass. 544, 549–550 (2004) (“As a rule, ‘[w]here the parties have expressed a specific intent as to the governing law, Massachusetts courts will uphold the parties’ choice as long as the result is not contrary to public policy.’ ”) (quoting Steranko v. Inforex, Inc., 5 Mass. App. Ct. 253, 260 (1977)).
– 4 –
3. Declaratory Judgment—Count One. Defendants are entitled to judgment in their favor on the claims for declaratory judgment as to whether Pri-Med could sell its Amazing Charts subsidiary, or the InLight assets of that subsidiary, after January 1, 2017, without the prior written consent of the Plaintiffs.
3.1. Construing the Contract. Section 7.9 of the LLC Agreement provided that certain corporate actions required prior consent of at least three of the four Plaintiffs, while they still owned the B-1 Shares of the company. This provision states, in relevant part, that “without the prior written consent of the Members holding a majority of the Series B-1 Shares, the Company and the Series A Members agree that they shall not:
(a) materially change the business focus of the Company;
* * * or
(e) prior to January 1, 2017, sell all or substantially all of the Company’s business whether by asset sale, stock sale or merger.”
It is undisputed that Pri-Med did not sell Amazing Charts or the InLight assets before January 1, 2017. Pri-Med represents, and it appears to be undisputed, that it sold Amazing Charts in September 2017. Pri-Med did not seek or obtain the approval of the Plaintiffs, as the B-1 shareholders, before selling this subsidiary. Plaintiffs allege that this sale materially changed the business focus of the Company by eliminating the health records part of the business. It is undisputed that the sale of Amazing Charts constituted the sale of substantially all of Pri-Med’s business.
The controversy at issue in the declaratory judgment claims turns on a question of contract interpretation. Defendants contend that Pri-Med could sell Amazing Charts without the B-1 shareholders’ approval pursuant to § 7.9(e) because the sale of substantially all of Pri-Med’s business did not require such approval after January 1, 2017. In response, Plaintiffs say that they “do not rely on § 7.9(e),” but instead are entitled to challenge the sale of Amazing Charts on the ground that it was a material change in the business focus of Pri-Med and therefore B-1 shareholder approval was required under § 7.9(a).
The proper interpretation of an unambiguous written contract is a question of law that may be resolved on a motion to dismiss or a motion for judgment on the pleadings. See, e.g., Gershen, ; Strougo v. Hollander, 111 A.3d 590, 594 (Del. Ch.
– 5 –
2015); Allied Capital Corp. v. GC-Sun Holdings, L.P., 910 A.2d 1020, 1030 (Del. Ch. 2006). “Contract language is not ambiguous merely because the parties dispute what it means.” Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381, 385 (Del. 2012). To the contrary, “[a] determination of whether a contract is ambiguous is a question for the court to resolve as a matter of law.” Kelly v. Blum, civ. action 4516-VCP, 2010 WL 629850, at *7 n.43 (Del. Ch. 2010), quoting HIFN, Inc. v. Intel Corp., civ. action 1835-VCS, 2007 WL 2801393, at *9 (Del. Ch. 2007).
To make sense of the disputed provisions, the Court must consider the contract as a whole and construe each provision in context, not in isolation. Stonewall Ins. Co. v. E.I. du Pont de Nemours & Co., 996 A.2d 1254 (Del. 2010). And it must interpret the contract in a manner that gives “meaning and effect” to each word and provision, under the reasonable assumption “that the parties would not include superfluous verbiage in their agreement.” Zimmerman v. Crothall, 62 A.3d 676, 691 (Del. Ch. 2013). In sum, the Court must “reconcile or harmonize all of the contract’s provisions.” Hampton v. Turner, civ. action 8963-VCN, 2015 WL 1947067, at * 3 (Del. Ch. 2015).
The Court concludes that Pri-Med was free to sell Amazing Charts or its InLight Assets after January 1, 2017, without obtaining approval from any of the Plaintiffs, as a matter of law. It construes paragraphs (a) and (e) of § 7.9 of the LLC Agreement as requiring B-1 shareholder approval (a) for any material change in Pri-Med’s business focus other than the sale of all or substantially all of the company’s business, without any time limitation and (e) for any sale of all or substantially all of the company’s business that took place before January 1, 2017.
Plaintiffs cannot evade the time limit established by agreement in § 7.9(e) by instead seeking to invoke § 7.9(a). Almost by definition, a sale of all or substantially all of Pri-Med’s business would inevitably result in a material change in Pri-Med’s business focus. The time limit for seeking approval to sell substantially all of the business in § 7.9(e) would not mean anything if such a transaction still required approval of the B-1 shareholders under § 7.9(a). As a result, the best and only reasonable way to harmonize the two provisions is to read § 7.9(a) in the manner described above.
– 6 –
3.2. Declaring Rights versus Dismissing Claim. Plaintiffs argue that the Court should not dismiss the declaratory judgment claims, but instead should declare the rights of the parties under § 7.9 of the LLC Agreement.
The appellate case law regarding whether and when a claim for declaratory judgment should be dismissed instead of declaring rights in favor of the defendant has become surprisingly muddled.
For years it had been well established that when a plaintiff seeks declaratory relief, that claim has been “properly brought” (meaning that the plaintiff had standing and there was an actual controversy between the parties), and a court determines that the plaintiff is not entitled to relief in its favor, “there must be a declaration of the rights of the parties” rather than merely a dismissal of the claim. City of Lynn v. Lynn Police Ass’n, 455 Mass. 590, 599 (2010); accord, e.g., Mscisz v. Kashner Davidson Securities Corp., 446 Mass. 1008, 1010 (2006) (rescript) (vacating judgment denying request for declaratory relief, and ordering declaration of rights in defendant’s favor); Coraccio v. Lowell Five Cents Savings Bank, 415 Mass. 145, 147-148 & n.3 (1993); Cherkes v. Town of Westport, 393 Mass. 9, 12 (1984) (vacating dismissal and ordering declaratory judgment in defendants’ favor); Pina v. Liberty Mut. Ins. Co., 388 Mass. 1001, 1002 (1983) (rescript) (same); Gleason v. Galvin, 374 Mass. 574, 577 (1978); Attorney General v. Kenco Optics, Inc., 369 Mass. 412, 418 (1976) (vacating dismissal and ordering declaratory judgment in defendants’ favor); see also Massachusetts Federation of Teachers v. Bd. of Education, 436 Mass. 763, 770 & n.10, 782 (2002) (affirming Superior Court’s entry of declaratory judgment in favor of defendant, in lieu of granting defendant’s motion to dismiss under Rule 12(b)(6)); Nelson v. Comm’r of Correction, 390 Mass. 379, 387-388 (1983) (same).
At least twice, however, the Supreme Judicial Court has held that dismissal of a complaint under Rule 12(b)(6) “does not constitute a decision on the merits, and therefore, declaratory judgment should not enter” where a complaint fails to state a claim upon which declaratory relief may be granted in favor of the plaintiff. Harvard Crimson, Inc. v. President and Fellows of Harvard College, 445 Mass. 745, 748 n.5 (2006); accord Wallerstein v. Bar Examiners, 414 Mass. 1008, 1009 (1993) (rescript).
– 7 –
The decisions in Harvard Crimson and Wallerstein cannot be squared with the other SJC holdings discussed above. Nor can they be squared with the Appeals Court’s repeated holdings that “[u]nder Massachusetts law, as elsewhere, a dismissal for failure to state a claim, under Mass. R. Civ. P. 12(b)(6), operates as a dismissal on the merits, see Mass. R. Civ. P. 41(b)(3), with res judicata effect.” Mestek, Inc. v. United Pacific Ins. Co., 40 Mass. App. Ct. 729, 731, rev. denied, 423 Mass. 1108 (1996), quoting Isaac v. Schwartz, 706 F.2d 15, 17 (1st Cir. 1983); accord TLT Const. Corp. v. Anthony Tappe and Assocs., Inc., 48 Mass. App. Ct. 1, 10 (1999).
In any case, Harvard Crimson and Wallerstein seem to have been superseded by City of Lynn and Mscisz.
Since the weight of authority requires that the Court declare the rights of the parties rather than dismiss the declaratory judgment claims, the Court will do what the Plaintiffs have requested. It will order that when final judgment enter it shall declare that Defendants had the right under the LLC Agreement to sell Amazing Charts or its assets after January 1, 2017, without first obtaining consent from any of the B-1 shareholders.
4. Implied Covenant of Good Faith and Fair Dealing—Count Three. Plaintiffs claim that Defendants’ alleged scheme to artificially deflate the value of Pri-Med violated the implied covenant of good faith and fair dealing that is part of the company’s LLC Agreement. The Court will deny the motions to dismiss these claims.
Under Delaware law, every contract includes an implied covenant of good faith and fair dealing. See, e.g., Dunlap v. State Farm Fire and Cas. Co., 878 A.2d 434, 442 (Del. 2005). This implied covenant “requires ‘a party in a contractual relationship to refrain from arbitrary or unreasonable conduct which has the effect of preventing the other party to the contract from receiving the fruits’ of the bargain.” Id., quoting Wilgus v. Salt Pond Inv. Co., 498 A.2d 151, 159 (Del. Ch. 1985).
In Delaware, “implied covenant of good faith and fair dealing involves … inferring contractual terms to handle developments or contractual gaps that … neither party anticipated.” Nationwide Emerging Mgrs., LLC v. Northpointe Holdings, LLC, 112 A.3d 878, 896 (Del. 2015), quoting Nemec v. Shrader, 991 A.2d 1120, 1125 (Del. 2010). It “is well-suited to imply contractual terms that are so
– 8 –
obvious — like a requirement that the general partner not engage in misleading or deceptive conduct … — that the drafter would not have needed to include the conditions as express terms in the agreement.” Dieckman v. Regency GP LP, 155 A.3d 358, 361 (Del. 2017).
Defendants argue that they cannot be sued under the implied covenant because all of the acts or omissions challenged in these claims, including the sale of Amazing Charters, are subject to express provisions of the LLC Agreement. They rely on the principle that “[t]he implied covenant will not infer language that contradicts a clear exercise of an express contractual right.” Nationwide Emerging Mgrs., 112 A.3d at 899, quoting Nemec, 991 A.2d at 1127.
This argument is without merit. Plaintiffs have plausibly alleged that Defendants undertook a course of action in a deliberate attempt to deny Plaintiffs the fruits of their bargain, by artificially depressing the value of their Pri-Med shares as of the time they were redeemed. They have therefore stated a viable claim for breach of the implied covenant.
Although the LLC Agreement gave Pri-Med and Diversified the sole discretion to sell all or substantially all of Pri-Med’s business after January 1, 2017, the implied covenant requires that such discretion by exercised in good faith and not used to deprive the minority members of the value of their shares. See generally Gerber v. Enterprise Products Holdings, LLC, 67 A.3d 400, 419 (Del. 2013) (implied covenant requires that when party is “exercising a discretionary right, [it] must exercise its discretion reasonably”); Airborne Health, Inc. v. Squid Soap, LP, civ. action 4410-VCL, 984 A.2d 126, 146-147 (Del. Ch. 2009) (“When a contract confers discretion on one party, the implied covenant requires that the discretion be used reasonably and in good faith.”).
Delaware courts have held that factual allegations that a contracting party has artificially inflated the value of a company’s accounts receivable or stock before completing a merger, in order to inflate the amount paid by the buyer, state a viable claim for breach of the implied covenant of good faith and fair dealing. Aviation West Charters, LLC v. Freer, civ. action N14C-09-271WCC CCLD, 2015 WL 5138285,
– 9 –
at *10 (Del. Supr. 2015) (accounts receivable); Kelly v. McKesson HBOC, Inc., civ. action 99C-09-265WCC, 2002 WL 88939, at *10 (Del. Supr. 2002) (stock value).
Here, Plaintiffs claim that Defendants artificially deflated the value of Pri-Med in order to decrease the amount that Pri-Med had to pay to redeem Defendants’ shares. That similarly states a viable claim for breach of the implied covenant.
5. Fiduciary Duty—Counts Four and Five.
5.1. Direct versus Derivative Action. Defendants argue that the claims against them for breach of fiduciary duty, or for aiding and abetting such a breach, may only be asserted as derivative claims on behalf of Pri-Med and may not be asserted as direct claims on behalf of the four former B-1 shareholders. The Court disagrees. If Plaintiffs had viable claims for breach of fiduciary duty they could assert them as direct claims on their own behalf.
As a general matter, Defendants are correct that alleged mismanagement of a limited liability company may only be challenged in a derivative action if the alleged harm was a fall in the value of the company or its stock. Under Delaware law, “actions charging ‘mismanagement which depress[] the value of stock [allege] a wrong to the corporation; i.e., the stockholders collectively, to be enforced by a derivative action.’ ” Kramer v. W. Pac. Indus., Inc., 546 A.2d 348, 353 (Del. 1988), quoting Bokat v. Getty Oil Co., 262 A.2d 246, 249 (Del. Supr. 1970); accord Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1038 (Del. 2004); Litman v. Prudential-Bache Properties, Inc., 611 A.2d 12, 16 (Del. Ch. 1992).
In this case, however, Plaintiffs allege that Defendants breached their fiduciary duties by deliberately taking actions to depress Pri-Med’s value as of the time that Pri-Med redeemed Defendants’ shares, solely to reduce the amount that Pri-Med had to pay Defendants for their shares. Since Plaintiffs are alleging a breach of a duty owed to them rather than to the corporation, and are asserting that the alleged breach resulted in a long-term windfall benefit to Defendants and caused Plaintiffs to suffer damages not incurred by other shareholders, they may bring their breach of fiduciary duty claims in a direct action on their own behalf. See Tooley, 845 A.2d at 1039; In re TD Banknorth Shareholders Litig., 938 A.2d 654, 667 (Del. Ch.
– 10 –
2007); Anglo American Security Fund, L.P. v. SR. Int’l Fund, L.P., 829 A.2d 143, 153 (Del. Ch. 2003).
Contrary to Defendants’ argument, this is not a case in which “all of a corporation’s stockholders are harmed and would recover pro rata in proportion with their ownership of the corporation’s stock solely because they are stockholders,” which would mean that “the claim is derivative in nature.” Feldman v. Cutaia, 951 A.2d 727, 733 (Del. 2008); accord El Paso Pipeline GP Company, LLC v. Brinckerhoff, 152 A.3d 1248, 1264 (Del. 2016). Instead, this is a case in which Plaintiffs have alleged facts plausibly suggesting that they “suffered some individualized harm not suffered by all of the stockholders at large,” which means they may assert direct claims. Feldman, supra.
5.2. Relationship to Contract Claims. The Court concludes, however, that it must dismiss the fiduciary duty claims because Defendants’ alleged malfeasance may only be changed in a claim for breach of contract.
“Delaware law does not impose a heightened fiduciary duty on shareholders in a close corporation;” it differs from Massachusetts law on this point. Harrison, 433 Mass. at 472, citing Riblet Prods. Corp. v. Nagy, 683 A.2d 37, 39 (Del. 1996) (noting that Delaware has not adopted duty of utmost good faith and loyalty established in Wilkes v. Springside Nursing Home, Inc., 370 Mass. 842, 848-849 (1976)), and Nixon v. Blackwell, 626 A.2d 1366, 1380-1381 (Del. 1993) (declining “to fashion a special judicially-created rule for minority investors”). “Instead, under Delaware law, minority shareholders can protect themselves by contract (i.e., negotiate for protection in stock agreements or employment contracts) before investing in the corporation.” Id. at 469.
Consistent with this principle, under Delaware law a claim by a corporate shareholder for breach of fiduciary duty against the corporation or its members, managers, or directors must be dismissed if the plaintiff has a viable claim that the same conduct constituted a breach of the LLC’s operating agreement. The plaintiff could sue for breach of contract under those circumstances, but could not also sue for breach of fiduciary duty. “ ‘[W]here a dispute arises from obligations that are expressly addressed by contract, that dispute will be treated as a breach of contract
– 11 –
claim’ and thus ‘any fiduciary claims arising out of the same facts that underlie the contract obligations would be foreclosed as superfluous.’ ”AM General Holdings LLC on behalf of Ilshar Capital LLC v. Renco Group, Inc., Del. Ch. C.A. No. 7639-VCN, 2013 WL 5863010, *10 (Del. Ch. 2013), quoting Nemec v. Shrader, 991 A.2d 1120, 1129 (Del. 2010)).
“This treatment of corresponding fiduciary duty and contract claims reflects Delaware’s perception that allowing ‘a fiduciary duty claim to coexist in parallel with [a contractual] claim, would undermine the primacy of contract law over fiduciary law in matters involving … contractual rights and obligations.’ ” CIM Urban Lending GP, LLC v. Cantor Commercial Real Estate Sponsor, L.P., civ. action 11060-VCN, 2016 WL 768904, at *3 (Del. Ch. 2016), quoting Grayson v. Imagination Station, Inc., civ. action 5051-CC 2010 WL 3221951, at *7 (Del. Ch. 2010). That is why Delaware “does not allow fiduciary duty claims to proceed in parallel with breach of contract claims unless ‘there is an “independent basis for the fiduciary duty claims apart from the contractual claims.” ’ ” Renco Grp., Inc. v. MacAndrews AMG Holdings LLC, civ. action 7668-VCN, 2015 WL 394011, at *7 (Del. Ch. 2015), quoting Grayson, supra, quoting in turn PT China LLC v. PT Korea LLC, civ. action 4456-VCN, 2010 WL 761145, at *7 (Del. Ch. 2010).
Nemec, like this case, concerned the exercise of a corporation’s right to redeem shares held by a minority shareholder. The corporation had the right to redeem plaintiff’s stock at any time at book value. 991 A.2d at 1123. In early 2008 the board of directors were negotiating the sale of a large part of the business. The directors redeemed plaintiffs’ shares in April 2008. They expected that the anticipated sale of part of the company would occur within days or weeks. That transaction closed in May 2008. Id. at 1124-1125. The fact that plaintiffs’ shares had already been redeemed “added nearly $ 60 million to the proceeds” received by the remaining stockholders. Id. at 1124.
The Delaware Supreme Court held that the Nemec plaintiffs could not sue the corporation’s directors for breach of fiduciary duty, because that claim arose “from a dispute relating to the exercise of a contractual right—the Company’s right to redeem the shares of retired nonworking stockholders” (emphasis in original). Id. at 1129.
– 12 –
It reasoned that “the nature and scope of the Director’s duties when causing the Company to exercise its right to redeem shares covered by the Stock Plan were intended to be defined solely by reference to that contract,” and thus that “[a]ny separate fiduciary duty claims that might arise out of the Company’s exercise of its contract right … were foreclosed.” Id.
The Court concludes that this case is indistinguishable from Nemec and that the Court must therefore dismiss Plaintiff’s fiduciary duty claims. Those claims are based on the same facts and the same alleged bad faith as Plaintiffs’ contract claims, especially the claim under the implied covenant of good faith and fair dealing. Plaintiffs may press their claims that Defendants violated the LLC Agreement, including the implied covenant. But under Delaware law they may not assert that the same acts and same alleged scheme also constitute a breach of fiduciary duty.
If anything, the principle that claims for breach of fiduciary duty are foreclosed where the dispute arises from obligations addressed by contract applies more clearly in this case than it did in Nemec. Here, the LLC Agreement expressly provides (in sections 7.4 and 11.1) that Pri-Med’s members would have the fiduciary duties imposed by the Delaware Limited Liability Company Act and that its managers would have the same fiduciary duties that are applicable to directors of a corporation organized and existing under the Delaware General Corporation Law. Since the LLC Agreement itself specifies the fiduciary duties that apply here, any claim that those duties were breached can be resolved as part of Plaintiffs’ claim for breach of contract. In addition, as explained above, Plaintiffs have stated a viable claim for breach of the implied covenant of good faith and fair dealing, unlike the plaintiffs in Nemec. See 991 A.2d at 1125-1128 (affirming dismissal of implied covenant claim).
Plaintiffs’ assertion that they should nonetheless be allowed to assert claims for breach of fiduciary duty against the three individual defendants (Wirth, Willing, and Dyer), because the LLC Agreement only imposes contractual obligations upon Pri-Med and its members but not on its managers, is without merit. Since the three individual defendants admit that they are managers of the company, under Delaware law they are all deemed to be “a party to” and are bound by Pri-Med’s LLC Agreement, even though the Agreement does not state that the managers are parties and none of
– 13 –
the individual defendants signed the contract on their own behalf. CompoSecure, L.L.C. v. CardUX, LLC, civ. action 12524-VCL, 2018 WL 660178, at *25 & n.299 (Del. Ch. 2018); 6 Del. C. § 18-101(7) (“A member or manager of a limited liability company or an assignee of a limited liability company interest is bound by the limited liability company agreement whether or not the member or manager or assignee executes the limited liability company agreement.”).
In sum, the Court concludes that it must dismiss Counts Four and Five in both complaints with prejudice.
6. Equitable Relief—Count Six. Defendants are also entitled to dismissal of Count Six of the complaints, which ask for different kinds of equitable relief.
Plaintiffs are not entitled to any of the proposed relief that is specified in Count Six. Plaintiffs may not seek or obtain an injunction barring the sale or transfer of Amazing Charts or its InLight assets, or unwinding any such transaction. The Court has ruled above that, as a matter of law, Pri-Med did not have to obtain written consent of the B-1 shareholders in order to sell the subsidiary Amazing Charts or its InLight assets after January 1, 2017. Similarly, Plaintiffs may not seek or obtain an injunction mandating judicial oversight of the contractual appraisal process. The Court has ruled on February 2, 2018, that requiring such oversight “would be inconsistent with the terms of the LLC Agreement and inconsistent with the governing Delaware law.” See Closser v. Penn Mutual Insurance Co., 457 A.2d 1081, 1087 (Del. 1983) (contract requiring parties to resolve valuation disputes through final and binding appraisal process “provide[s] a mandatory form of arbitration, precluding recourse to the courts”).
To the extent that Count Six seeks other unspecified equitable relief, it merely “states a claim for a remedy, not a cause of action.” Unitrode Corp. v. Linear Tech. Corp., No. 98-5983, 11 Mass. L. Rptr. 145, 2000 WL 281688, at *5 (Mass. Supr. 2000) (Botsford, J.). To the extent that Defendants prevail on their remaining claims they are entitled to seek equitable relief, if appropriate. But Count Six “adds nothing to the complaint that is not already there” in the prayer for equitable relief on the other claims. Id.
– 14 –
“Injunctions are a form of relief, not a cause of action.” Quadrant Structured Products Co., Ltd. v. Vertin, 102 A.3d 155, 203 (Del. Ch. 2014) (dismissing claims); accord Long v. Dell, Inc., 93 A.3d 988, 1004 (R.I. 2014) (“An injunction is a remedy, not a cause of action.”) (affirming dismissal of claims); Goerlitz v. City of Maryville, 333 S.W.3d 450, 455 (Mo. 2011) (en banc) (same, affirming summary judgment). “There is no such thing as a suit for a traditional injunction in the abstract. For a traditional injunction to be even theoretically available, a plaintiff must be able to articulate a basis for relief that would withstand scrutiny under” a motion to dismiss for failure to state a claim. Alabama v. U.S. Army Corps of Engineers, 424 F.3d 1118, 1127 (11th Cir. 2005), quoting Klay v. United Healthgroup, Inc. 376 F.3d 1092, 1097 (11th Cir.2004).
The Court will therefore dismiss the standalone claims for equitable relief without prejudice.
ORDER
Defendants’ partial motions to dismiss are ALLOWED IN PART and DENIED IN PART as follows. (a) The motions are ALLOWED as to the requests for declaratory relief in Count One in each complaint. When final judgment enters, it shall include a declaration that DBC Pri-Med, LLC, had a contractual right to sell the company known as Amazing Charts or the so-called InLight assets of that company after January 1, 2017, without obtaining written consent from any of the holders of B-1 Shares of DBC Pri-Med. (b) The motions are DENIED with respect to the claim for breach of the implied covenant of fair dealing in Count Three. (c) The motions are ALLOWED with respect to the claims for breach of fiduciary duty in Count Four and for aiding and abetting a breach of fiduciary duty in Count Five. Those claims are dismissed with prejudice. (d) The motions are ALLOWED with respect to the requests for equitable relief in Count Six, which are hereby dismissed without prejudice.
March 2, 2018
___________________________
Kenneth W. Salinger
Justice of the Superior Court

Full-text Opinions